# Whitehouse Hotel Limited Partnership, QHR Holdings-New Orleans, Ltd., Tax Matters Partner v. Commissioner

> United States Tax Court · October 23, 2012 · 139 T.C. 304

URL: https://www.frixlaw.com/law-library/cases/4339383

## Case

- **Full name:** Whitehouse Hotel Limited Partnership, QHR Holdings-New Orleans, Ltd., Tax Matters Partner, Petitioner v. Commissioner of Internal Revenue, Respondent
- **Court:** United States Tax Court
- **Decided:** October 23, 2012
- **Citations:** 139 T.C. 304; 139 T.C. No. 13; 2012 U.S. Tax Ct. LEXIS 40
- **Opinion:** Opinion by Halpern
- **Judges:** Halpern
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

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## How later opinions describe it (automated extraction)

- rejecting capitalization-of-income approach where corporation had just come into existence

## Opinion text

WHITEHOUSE HOTEL LIMITED PARTNERSHIP, QHR
HOLDINGS—NEW ORLEANS, LTD., TAX MATTERS
PARTNER, PETITIONER v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT*

Docket No. 12104–03. Filed October 23, 2012.

On remand from the U.S. Court of Appeals for the Fifth
Circuit for further proceedings in accordance with its opinion
in Whitehouse Hotel Ltd. P’ship v. Commissioner, 615 F.3d
321 (5th Cir. 2010), vacating and remanding 131 T.C. 112
(2008), we reconsider the value of the qualified conservation
contribution made by W and whether, on account of that con-
tribution, W is subject to an accuracy-related penalty on
account of a substantial or gross valuation misstatement.
1. Held: Value of contribution determined: deduction over-
stated.

* This Opinion supplements our Opinion in Whitehouse Hotel Ltd. P’ship v. Commissioner, 131
T.C. 112 (2008), vacated and remanded, 615 F.3d 321 (5th Cir. 2010).

304

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2. Held, further, overstatement is gross valuation
misstatement.
3. Held, further, accuracy-related penalty applicable
because reasonable cause for underpayment of tax not shown.

Gary J. Elkins, Yvonne Chalker, and Thomas M. Beh, for
petitioner.
Jeffrey S. Luechtefeld, for respondent.

CONTENTS

SUPPLEMENTAL OPINION ................................................................ 306
Discussion ................................................................................................ 314
I. Introduction ....................................................................................... 314
II. Approaches to Valuation ................................................................. 315
A. Cost Approach .............................................................................. 315
1.In General ................................................................................. 315
2.Comparing Petitioner’s Historic Cost to Mr. Roddewig’s
Cost Estimate ........................................................................ 318
3. Terra Cotta Reproduction Cost ................................................ 318
4. External Obsolescence .............................................................. 319
5. Land Value ................................................................................ 320
6. Conclusion ................................................................................. 321
B. Income Approach ......................................................................... 321
1. Introduction ............................................................................... 321
2. In General ................................................................................. 321
3. Conclusion ................................................................................. 326
C. Comparable-Sales Approach ....................................................... 328
1. Introduction ............................................................................... 328
2. Disregard of Sales of Nonlocal Comparable Properties ......... 329
3. Highest and Best Use ............................................................... 330
4. Second-Best Use ........................................................................ 332
5. Conclusion ................................................................................. 336
III. Effect of the Servitude ................................................................... 337
A. Introduction .................................................................................. 337
B. The Conveyance ........................................................................... 340
1. Introduction ............................................................................... 340
2. Parties’ Arguments ................................................................... 342
3. Discussion .................................................................................. 342
C. Conclusion .................................................................................... 347
IV. Valuation of the Servitude ............................................................ 347
V. Valuation Misstatement Penalty .................................................... 348
A. Introduction .................................................................................. 348
B. Discussion ..................................................................................... 350

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306 139 UNITED STATES TAX COURT REPORTS (304)

1. Testimony of Mr. Drawbridge .................................................. 350
2. Court of Appeals’ Counsel ........................................................ 351
3. Petitioner’s Burden ................................................................... 352
4. The Revac Appraisal ................................................................. 355
5. Form 8283 ................................................................................. 356
6. Investigation .............................................................................. 357
7. Reliance on Advice and Counsel .............................................. 359
8. Conclusion ................................................................................. 361
C. Conclusion .................................................................................... 362
VI. Conclusion ...................................................................................... 362
APPENDIX .............................................................................................. 362

SUPPLEMENTAL OPINION

HALPERN, Judge: This case is before us on remand from
the U.S. Court of Appeals for the Fifth Circuit (Court of
Appeals) for further proceedings in accordance with its
opinion in Whitehouse Hotel Ltd. P’ship v. Commissioner, 615
F.3d 321 (5th Cir. 2010) (Whitehouse II), vacating and
remanding 131 T.C. 112 (2008) (Whitehouse I). The case
arose on account of the parties’ disagreement as to the value
of the qualified conservation contribution made by
Whitehouse Hotel Limited Partnership (partnership) when,
in 1997, it conveyed a qualified real property interest, viz, a
perpetual conservation restriction, to Preservation Alliance of
New Orleans, Inc., d.b.a. Preservation Resource Center of
New Orleans (PRC), a Louisiana nonprofit corporation. The
Court of Appeals instructed us to reconsider (1) our finding
as to the value of the contribution and (2) our determination
sustaining an accuracy-related penalty.
At our request, the parties filed supplemental briefs in
which they were to address both issues that we had identi-
fied and issues that they might identify.
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for 1997, and all Rule ref-
erences are to the Tax Court Rules of Practice and Proce-
dure.

Background
We incorporate herein by this reference the facts that,
under the heading FINDINGS OF FACT, we found in Whitehouse
I, 131 T.C. at 115–120 (including the stipulation of facts,

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supplemental stipulation of facts, and second supplemental
stipulation of facts), which we do not believe the Court of
Appeals disturbed. We summarize pertinent facts and por-
tions of our Opinion in Whitehouse I for the benefit of the
reader.
The Partnership, the Maison Blanche and Kress Buildings,
the Ritz-Carlton Agreement
The partnership is a Louisiana limited partnership formed
in 1995. On December 21, 1995, the partnership acquired a
parcel of improved real property in New Orleans, Louisiana,
on the square (block) bordered by Canal, Burgundy, Iberville,
and Dauphine Streets. Principally, the parcel consisted of a
historic building, the Maison Blanche Building, built between
1907 and 1909, two annexes, one built in the 1920s and the
other built in the 1950s, and the land under all. At the time
the partnership acquired the parcel, the first through third
floors of the Maison Blanche Building were under lease to
Maison Blanche, Inc., for use as a department store. The les-
see had previously prepaid rent for a term ending in 2004.
The upper floors of the building were vacant. The partner-
ship agreed to pay $6 million for the parcel plus additional
amounts based on the partnership’s ‘‘Net Cash Flow’’ and
‘‘Net Capital Proceeds’’. In September 1996, the partnership
paid an additional $625,000 in cancellation of its obligation
to pay those additional amounts and for other things. In Sep-
tember 1996, the partnership bought out the remaining term
of the lease for $3,375,938 and obtained the right to use the
Maison Blanche name.
The Maison Blanche Building consists of a base level and
an eight-level U-shaped tower. Exterior street facades of the
Maison Blanche Building consist almost entirely of glazed
terra cotta; some interior portions of the building (e.g.,
interior courtyard areas) are primarily constructed of white
glazed brick with less extensive terra cotta ornamentation.
The Maison Blanche Building fronts on Canal Street.
The Maison Blanche Building is adjacent to the Vieux
Carre´ (French Quarter) neighborhood of New Orleans. It is
in both the Vieux Carre´ National Historic District and the
Canal Street Historic District, which is part of the Central
Business District. The Central Business District Historic Dis-

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trict Landmark Commission determined that the Maison
Blanche Building is a building of major architectural impor-
tance.
On February 19, 1997, the partnership and the Ritz-
Carlton Hotel Co., L.L.C. (Ritz-Carlton), entered into agree-
ments under which the partnership agreed to renovate the
Maison Blanche Building and the as-yet-unacquired neigh-
boring Kress Building and Ritz-Carlton agreed to operate a
Ritz-Carlton Hotel in the renovated buildings. Ritz-Carlton
was to receive certain fees and expense reimbursements in
exchange for its services.
On or about October 30, 1997, the partnership purchased
additional property in the same block as the Maison Blanche
Building, including the Kress Building, which is adjacent to
the Maison Blanche Building, and the Kress parking garage.
The Kress Building was built in 1910, consists of six levels,
and fronts on Canal Street. The partnership paid $3.4 mil-
lion for the additional property, $1 million allocable to the
Kress Building.
Treating all of the partnership’s expenditures to assemble
the Maison Blanche-Kress parcel as having been made in
December 1995, the partnership paid $11,000,938
($6,625,000 + $1,000,000 + $3,375,938) to assemble the
parcel.
The Maison Blanche Building, its annexes, the Kress
Building, and the Kress parking garage were ultimately
developed into a 452-room Ritz-Carlton Hotel and into other
hotel facilities. The Ritz-Carlton Hotel, and associated facili-
ties, commenced operations on October 6, 2000.
The Servitude
On December 29, 1997 (valuation date), the partnership
conveyed certain of its rights in the Maison Blanche Building
to PRC. The conveyance was by ‘‘Act of Donation of Perpetual
Real Rights’’ (conveyance). A copy of the conveyance,
excluding exhibits, is appended hereto. In summary, the
conveyance provides that: (1) the owner (i.e., the partnership)
intends to convert the Maison Blanche Building (described as
the ‘‘Improvement’’ (improvement), to distinguish it from the
underlying land) into a hotel; (2) there is no servitude or
other encumbrance that would limit the rights conveyed; (3)

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the rights conveyed (described as the ‘‘Servitude’’ (servitude))
are conveyed in perpetuity; (4) the servitude relates to cer-
tain exterior surfaces of the improvement (referred to as the
‘‘Facade’’ (facade)); (5) the owner will maintain the facade in
a good and sound state of repair; (6) without permission, the
owner will do nothing in or to the facade that would alter its
appearance; and (7) PRC has the right to require the owner
to maintain the facade. On December 29, 1997, the convey-
ance was filed for registry in the conveyance records of the
parish of Orleans.
La. Rev. Stat. Ann. sec. 9:1252 (2008)
Petitioner tax matters partner claims that the servitude
was created in accordance with the express statutory provi-
sions of La. Rev. Stat. Ann. sec. 9:1252. La. Rev. Stat. Ann.
sec. 9:1252 provides for the creation of a perpetual real right
burdening the whole or any part of immovable property,
including but not limited to its facade, in favor of an entity
formed exclusively for certain public purposes. Pertinent por-
tions of that section are set out in the margin. 1
The Charitable Contribution and Respondent’s Examination
On account of the conveyance of the servitude to PRC, the
partnership claimed a charitable contribution deduction of
1 La. Rev. Stat. Ann. sec. 9:1252 (2008) provides in part:
Creation of real right for educational, charitable, or historic purposes
A. The owner of immovable property may create a perpetual real right burdening the whole
or any part thereof of that immovable property, including, but not limited to, the facade, exte-
rior, roof, or front of any improvements thereon to any corporation, trust, community chest,
fund, or foundation, organized and operated exclusively for religious, scientific, literary, chari-
table, educational, or historical purposes, no part of the net earnings of which inure to the ben-
efit of any private shareholder or individual, or to the United States, the state of Louisiana,
or any political subdivision of any of the foregoing. A real right established pursuant hereto may
additionally obligate the owner of the immovable property as is necessary to fully execute the
rights granted herein.
B. A real right created pursuant to this Section shall be binding on the grantor, his heirs,
successors, assigns, and all subsequent owners of the immovable property, regardless of the fact
that the grantee does not own or possess any interest in a neighboring estate or the fact that
the real right is granted to the grantee and not to the estate of the grantee, the fact that the
real right was not created as a part of a common development or building plan, devised by an
ancestor in title of the grantor.
C. A real right created under the authority of this Section shall be granted by authentic act
and shall be effective against third parties when filed for registry in the conveyance records of
the parish in which the immovable property is located. Any right or obligation imposed on the
owner of the immovable property by the real right created pursuant hereto, including any af-
firmative obligation established therein, shall be enforceable by the grantee through judicial pro-
ceeding by actions for injunctions or damages brought by the grantee.

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310 139 UNITED STATES TAX COURT REPORTS (304)

$7.445 million on its 1997 Form 1065, U.S. Partnership
Return of Income (1997 Form 1065). Respondent examined
the 1997 Form 1065 and determined that the $7.445 million
charitable contribution deduction should be reduced by
$6.295 million since the partnership had not established that
the loss of value on account of the conveyance of the ser-
vitude exceeded $1.15 million. On account of the size of his
reduction in value, respondent determined that an accuracy-
related penalty under section 6662(a) is applicable. This pro-
ceeding, in which petitioner challenges both respondent’s
reduction in value of the charitable contribution deduction
and the accuracy-related penalty, followed.
Expert Testimony as to the Value of the Servitude
The parties agree that the partnership is entitled to a
charitable contribution deduction for 1997 on account of its
conveying the servitude to PRC. They disagree as to the
amount of the deduction because they disagree as to
the value of the servitude. The parties relied exclusively on
expert testimony to establish the value of the servitude.
Petitioner called as its expert witness Richard J. Roddewig,
whom we accepted as an expert with respect to (1) the valu-
ation of conservation easements and (2) the site selection,
feasibility, and valuation of hotels. Mr. Roddewig is a real
estate appraiser and attorney. He is a member of the
Appraisal Institute, and he holds its MAI designation. He con-
ducts his appraisal business from Chicago, Illinois. He
obtained a temporary license from the State of Louisiana as
a certified general real estate appraiser for the purpose of
making his appraisal here under consideration. Before
reaching his conclusion as to the loss in value occasioned by
the partnership’s conveyance of the servitude to PRC (some-
times, value of the servitude) he spent four to six days in
New Orleans. His staff made additional visits. Mr.
Roddewig’s previous appraisal experience in Louisiana con-
sisted of two or three preliminary appraisals made in the
early 1980s of preservation easement grants in New Orleans
and a market feasibility study for a site in Lafayette, Lou-
isiana. We received his written report, dated August 9, 2005,
as his direct testimony.

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Respondent called as his expert witness Richard Dunbar
Argote, whom we accepted as an expert with respect to
commercial real estate appraisal. Mr. Argote is licensed by
the State of Louisiana as a certified general real estate
appraiser and as a real estate broker. Like Mr. Roddewig, he
is a member of the Appraisal Institute and holds its MAI des-
ignation. Mr. Argote has been appraising real estate in Lou-
isiana for over 25 years. From 1990 to 2000, he appraised
between 50 and 70 buildings in and around New Orleans
that were to be used as or converted into hotels. About 85%
of those appraisals were of buildings located within the Cen-
tral Business District or the Vieux Carre´. Over the years,
Mr. Argote has appraised every building within the same
square as the Maison Blanche Building. He has appraised
the Maison Blanche Building on three prior occasions. After
addressing objections, we received his written report, dated
October 31, 2006, as his direct testimony.
Each expert arrived at an opinion as to the fair market
value of the servitude by making the before and after
comparison contemplated by the applicable regulations. See
sec. 1.170A–14(h)(3)(i), Income Tax Regs. Petitioner’s expert,
Mr. Roddewig, determined the requisite before and after
values in three different ways. He relied primarily on a
reproduction cost approach and an income approach, but he
also used, in part, a comparable-sales approach. He deter-
mined that the appropriate parcel of property to value was
the Maison Blanche Building, the 1920s and 1950s annexes,
and the Kress Building (Maison Blanche-Kress parcel). He
determined the following before- and after-restriction values:

Before-restriction values

Cost approach ........................................................ $43,000,000
Adjusted income approach .................................... 41,000,000
Comparable-sales approach .................................. 40,000,000

After-restriction values

Cost approach ................................................ $35,500,000
Adjusted income approach ............................ 28,000,000
Comparable-sales approach .......................... ---

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He determined no after-restriction comparable-sales-
approach value because he found no directly relevant after-
restriction sales. Taking into account his three approaches,
but giving significant weight to the adjusted income
approach because of the purported uniqueness in New
Orleans of the Maison Blanche-Kress parcel, he reached the
following ultimate determinations as to the before- and after-
restriction values of the Maison Blanche-Kress parcel and
the value of the servitude:

Value of the servitude

Before-restriction value ................................ $41,000,000
After-restriction value ................................... 31,000,000

Difference; i.e., fair market value of the
servitude ..................................................... 10,000,000
Respondent’s expert, Mr. Argote, relied exclusively on a
comparable-sales approach. He concluded that the before-
restriction value of the Maison Blanche Building was $10.3
million and the after-restriction value was $10.3 million. He
determined that the value of the servitude was zero. Not-
withstanding Mr. Argote’s opinion that the value of the ser-
vitude was zero, respondent did not ask that we find that the
value was any less than the $1.15 million he determined in
his examination.
Highest and Best Use
In Whitehouse I, we acknowledged that the fair market
value of property is determined by taking into account the
highest and best use of that property on the valuation date.
Whitehouse I, 131 T.C. at 130 (citing Stanley Works v.
Commissioner, 87 T.C. 389, 400 (1986)). We explained that
the experts differed on whether the conveyance changed the
highest and best use of the property each valued. We stated:
Mr. Roddewig determined the highest and best use of the Maison Blanche-
Kress parcel before the conveyance was a mixed use development,
including a Ritz-Carlton Hotel with 512 rooms (60 of them above the Kress
Building), an additional all-suites hotel with approximately 268 rooms, and
retail use on the first two floors and mezzanine of the Maison Blanche
Building. He determined that the highest and best use of the Maison
Blanche-Kress parcel after the conveyance was different in that: ‘‘The

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opportunity to add up to 60 additional hotel rooms [above the Kress
Building] * * * [had] been eliminated.’’ That difference contributed to his
conclusion that, under both the cost and income approaches, the fair
market value of the Maison Blanche-Kress parcel was reduced on account
of the conveyance. Mr. Argote believes the highest and best use of the
Maison Blanche Building both before and after the conveyance was use as
a hotel (not necessarily a Ritz-Carlton Hotel) with retail space.
[Whitehouse I, 131 T.C. at 130–131.]

Essential to Mr. Roddewig’s opinion was his belief that the
conveyance eliminated the possibility of constructing 60 hotel
rooms above the Kress Building. Considering the question to
be one of local (Louisiana) law, we found that, on the evi-
dence before us, the conveyance created no charge on the
Kress Building in favor of PRC. Id. at 134. Therefore, we
stated: ‘‘Petitioner has failed to show that the highest and
best use of the Maison Blanche-Kress parcel after the
conveyance differed from its highest and best use before the
conveyance on account of the conveyance’s depriving
the partnership of the ability to add 60 hotel rooms above the
Kress Building.’’ Id. at 135. We concluded: ‘‘Mr. Roddewig
erred in his opinion that the highest and best use of the
Maison Blanche-Kress parcel differed after the conveyance on
account of the partnership’s disability to add 60 hotel rooms
above the Kress Building.’’ Id. We stated that we would take
that error into account in considering his valuation conclu-
sions. Id.
Our Analysis of Value
Mr. Roddewig failed to persuade us that $43 million and
$35.5 million are reliable estimates of the before- and after-
restriction reproduction costs, respectively, of the Maison
Blanche-Kress parcel, or that the resulting value of the ser-
vitude is $7.5 million. We therefore disregarded petitioner’s
cost approach in determining the value of the servitude. Id.
at 152. Because we believed that (1) that there was a risk
of error inherent in the income approach as applied by Mr.
Roddewig and (2) we had reliable alternative evidence of
value arrived at by the comparable-sales approach, we also
rejected petitioner’s income approach in determining the
value of the servitude. Id. at 156. We relied exclusively on
the comparable-sales approach to determine the value of the
servitude. Id. at 171–172. Of note, we rejected Mr.

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Roddewig’s use of nonlocal comparables, id. at 158, and his
adjustment for the higher room rates expected at a Ritz-
Carlton Hotel (price point adjustment), id. at 159. We found
a before-restriction value for the Maison Blanche Building
under the comparable-sales approach of $12,092,301. Id. at
168. We accepted Mr. Argote’s determination that the after-
restriction value of the Maison Blanche Building under the
comparable-sales approach is $10.3 million, and found
accordingly. Id. at 171. We found the difference, $1,792,301,
to be the fair market value of the servitude on the valuation
date. Id. at 172.
Valuation-Misstatement Penalty
On the basis of our determination of the value of the ser-
vitude, we concluded that the partnership had overstated the
value of the servitude on the 1997 Form 1065 by more than
400%, and, therefore, it had made a gross valuation
misstatement. Id. at 176. We found no reasonable cause for
the misstatement. Id. We therefore sustained application of
an accuracy-related penalty under section 6662(a) on the
basis of a gross valuation misstatement. Id.

Discussion
I. Introduction
‘‘In sum’’, the Court of Appeals stated, we
erred in declining to consider the Maison Blanche and Kress buildings’
highest and best use in the light of both the reasonable and probable con-
dominium regime and the reasonable and probable combination of those
buildings into a single functional unit, both of which foreclosed the real-
istic possibility, for valuation purposes, that the Kress and Maison Blanche
buildings could come under separate ownership. This combination affected
the buildings’ fair market value. [Whitehouse II, 615 F.3d at 340.]

It instructed us as follows as to our tasks on remand:
The effect of the easement’s impact on the property’s fair market value,
such as prohibiting building 60 additional rooms on top of the Kress
building, is a question of fact for the tax court to decide on remand. There-
fore, we vacate its valuation and remand for reconsideration of the ease-
ment’s value. As discussed supra, in making this valuation on remand, the
tax court should, among other things, reconsider the experts’ reports and
valuation methods (including, inter alia, using non-local comparables) and

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their conclusions regarding highest and best use as a luxury or non-luxury
hotel. [Id.]

It also included among our tasks reconsideration, if nec-
essary, of our penalty determination. Id. at 341.
We shall undertake our tasks as follows. First, we shall
reconsider whether the before and after values of the encum-
bered property are best arrived at under the comparable-
sales approach to valuation rather than the cost approach or
the income approach. In doing so, we shall explain our reli-
ance in applying the comparable-sales approach on properties
in the Vieux Carre´ and the Central Business District, which
implicates our consideration of the highest and best use of
the Maison Blanche Building. Second, we shall explain our
conclusion that the servitude did not deprive the partnership
of the ability to add stories above the Kress Building. We
shall, however, make an additional finding on the bases that,
(1) the servitude did so deprive the partnership and, (2) the
pending combination of the Maison Blanche and Kress
Buildings made unlikely separate ownership of the two
buildings. Finally, we shall revisit the penalty.
II. Approaches to Valuation
A. Cost Approach
1. In General
We have reconsidered Mr. Roddewig’s testimony regarding
the value of the servitude under the reproduction cost
approach and, because we find it unreliable, continue to
accord it no weight.
In its supplemental brief, petitioner suggests that in
Whitehouse I we may have implied that the reproduction cost
‘‘approach should never be used to value historic properties’’.
That is not our position. In Whitehouse I, 131 T.C. at 147,
we stated:
We have in the past questioned the suitability of the reproduction cost
approach when applied to value older, historic structures. Dorsey v.
Commissioner, T.C. Memo. 1990–242; Losch v. Commissioner, T.C. Memo.
1988–230. For example, reproduction cost is of little assistance if no one
would think of reproducing the property. United States v. Toronto, Ham-
ilton & Buffalo Navigation Co., 338 U.S. 396, 403 (1949). * * *

With respect to the Maison Blanche Building, we continued:

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316 139 UNITED STATES TAX COURT REPORTS (304)

The Maison Blanche Building was built between 1907 and 1909. It is true
that the servitude obligates the building’s owner to repair the facade and
structural elements of the building if they are damaged. In the case of a
total loss or destruction of the building, however, the servitude provides:
‘‘Owner shall promptly remove all debris and trash and properly maintain
the Land. Owner must obtain Donee’s written approval of and prior con-
sent to any construction or reconstruction of * * * [the Maison Blanche
Building], as provided herein. * * * [Whitehouse I, 131 T.C. at 147.]

We concluded: ‘‘Petitioner has failed to convince us that, not-
withstanding the historic significance of the Maison Blanche
Building, the owners of the building would want to, or would
be required to, reconstruct that 100-year-old structure if it
were destroyed.’’ Id.
The simple explanation for petitioner’s failure of proof on
that score is that it cannot show that it would be a reason-
able business venture to reproduce so old a building. Indeed,
the reproduction cost approach is in general problematic for
determining the value of a historic structure. The problem is
described thus in the section of the Powell treatise on real
property dealing with how valuation and appraisal methods
vary for conservation easements:
The cost approach to valuation encounters substantial difficulties when
applied to historic structures (virtually its only application in the conserva-
tion easement context). The reproduction cost of an historic building usu-
ally bears little relationship to its present economic value. Such cost is
usually far in excess of the cost of construction of a similarly sized modern
structure, and may reflect the price of materials and workmanship that
are no longer readily available. * * * [Richard R. Powell, Powell on Real
Property, sec. 34A.06, at 34A–54 (M. Wolf ed. 2012).]

The treatise concludes its discussion of the appropriateness
of the reproduction cost approach to valuing historic improve-
ments to land as follows:
[T]his method of valuation has substantial disadvantages in the best of cir-
cumstances. Its utility has been questioned and it should be used with
care, if it is used at all, in connection with the appraisal of structures sub-
ject to conservation easements.19
Footnote 19. One authority has concluded, ‘‘The assumption, often
reflected in the opinions of the highest courts, that replaceable property is
usually worth its replacement cost, minus conventional deductions for
depreciation, is utterly unwarranted and is constantly belied by business
experience.’’ Bonbright, The Valuation of Property 176 (1937) (emphasis in
original). As a general proposition, ‘‘[R]eproduction cost should be utilized
only in those limited instances in which no other method of valuation will

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yield a legally and economically realistic value for the property.’’ (Great
Atlantic and Pacific Tea Co. v. Kiernan, 42 N.Y.2d 236, 242, 397 N.Y.S.2d
718, 723, 366 N.E.2d 808, 812 (1977)).
[Id.]

In accord with the authority cited by the Powell treatise,
the Court of Appeals has said that, for the reproduction cost
approach to be appropriate, ‘‘there must be a showing that
substantial reproduction would be a reasonable business ven-
ture’’. United States v. Benning Housing Corp., 276 F.2d 248,
250 (5th Cir. 1960). The Court of Appeals further observed
that, where the reproduction cost approach is inapposite,
reproduction cost evidence generally should be excluded from
jury trials (such as in condemnation proceedings) because
such evidence ‘‘almost invariably tends to inflate valuation.’’
Id. (fn. ref. omitted). ‘‘This is so’’, the court continued,
‘‘because the reproduction cost of a structure sets an absolute
ceiling on the market price of that structure, a ceiling which
may not be, and most frequently is not, even approached in
actual market negotiations.’’ Id. (fn. ref. omitted).
Following that line of reasoning, the Court of Appeals for
the Eighth Circuit has stated the rule more generally: ‘‘For
the reproduction cost appropriately to have an impact on the
value equation, the taxpayer must establish ‘a probative cor-
relation between [it] and fair market value.’ ’’ Estate of
Palmer v. Commissioner, 839 F.2d 420, 424 (8th Cir. 1988)
(quoting Rainier Cos. v. Commissioner, T.C. Memo. 1977–
351), rev’g and remanding 86 T.C. 66 (1986); see also Crocker
v. Commissioner, T.C. Memo. 1998–204 (same with respect to
replacement cost, citing Estate of Palmer).
Thus, without a showing by petitioner that reconstruction
of the Maison Blanche Building, if destroyed, would be a
reasonable business venture, petitioner has failed to convince
us that there is a probative correlation between Mr.
Roddewig’s estimate of the reproduction cost of the Maison
Blanche Building and the fair market value of that property.
And while that might be a sufficient basis to disregard Mr.
Roddewig’s testimony concerning cost, we believe that there
are additional reasons for doing so, which we discussed in
Whitehouse I, and which we summarize here.

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2. Comparing Petitioner’s Historic Cost to Mr. Roddewig’s
Cost Estimate
In Whitehouse I, 131 T.C. at 148–150, we questioned
whether Mr. Roddewig’s estimate of a before-restriction value
of $43 million for the Maison Blanche-Kress parcel correlated
with its market value because of the huge difference between
his estimate of its before-restriction reproduction cost—$43
million—and what the partnership actually paid for the
parcel no more than two years earlier—slightly more than
$11 million. After reviewing his list of reasons for the
increase in value of the Maison Blanche Building, we stated:
‘‘Simply put, we cannot reconcile Mr. Roddewig’s report of a
New Orleans real estate market enjoying, at best, stable
growth with his explanation of 291-percent appreciation in
the value of the Maison Blanche-Kress parcel.’’ Id. at 149–
150. We are still of that conclusion. 2
3. Terra Cotta Reproduction Cost
Mr. Roddewig was of the opinion that the reproduction cost
of the Maison Blanche Building shell and the Kress Building
on the valuation date, before depreciation and obsolescence,
was $54.3 million. Of that total estimated cost of reproduc-
tion, he attributed $42.025 million to reproducing the terra
cotta facade on the Maison Blanche Building. Because we
found that he insufficiently supported his terra cotta repro-
duction cost estimate (his testimony as to that cost being the
only evidence of it in the record), and because that estimate
was the major element of his reproduction cost estimate, we
gave no weight to his conclusion that the total cost to
reproduce the Maison Blanche Building shell and the Kress
Building is $54.3 million. Mindful of the fact that, since the
conveyance, the partnership has spent $7.792 million
repairing and restoring the terra cotta facade, plus $421,000
to repair damage from Hurricane Katrina, we still accord Mr.
Roddewig’s testimony as to the reproduction cost of the
Maison Blanche Building shell and the Kress Building no
2 In passing, we note that, in considering the correlation, we did not take into account either

expert’s opinion as to the highest and best use of the Maison Blanche-Kress parcel; we merely
considered the relative prices as evidence of the correlation (or lack thereof) between the time-
adjusted cost of acquiring the parcel and Mr. Roddewig’s estimate of the cost of reproducing it.

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weight because of the inadequacy of his testimony as to the
terra cotta reproduction cost. 3
4. External Obsolescence
In both his before- and after-restriction calculations of
reproduction cost, Mr. Roddewig deducted an amount to
reflect external obsolescence: 15% of the before-restriction
depreciated reproduction cost and 30% of the after-restriction
depreciated reproduction cost ($6,516,000 and $13,846,500,
respectively). He described the before-restriction external
obsolescence as resulting from the designation of the Maison
Blanche-Kress parcel as part of the Canal Street Historic
District. He described his doubling of that figure to reflect
after-restriction external obsolescence as resulting from his
judgment of the added burden imposed on the owner of the
parcel by the servitude. We refused to rely on his judgment
alone that the enforcement of the provisions of the servitude
double the cost of external obsolescence. We explained that
our lack of confidence in his judgment was based on our
impression that his $43 million estimate of the before-restric-
tion value of the Maison Blanche-Kress parcel defied reason.
3 For convenience, we set forth the analysis of his testimony that we made in Whitehouse Hotel

Ltd. P’ship v. Commissioner, 131 T.C. 112, 150 (2008) (Whitehouse I), vacated and remanded,
615 F.3d 321 (5th Cir. 2010):
His testimony is based upon estimates which he obtained from terra cotta industry specialists,
rather than from his own experience.14 The estimated cost is not detailed or broken down, mak-
ing it impossible for us to know what is and is not included and how the cost was determined.
While the terra cotta specialists he relied on may be highly qualified, he has not articulated
the facts relied on by, and the reasoning of, those specialists, which prevents us from properly
evaluating both their and his conclusions. See Estate of Palmer v. Commissioner, T.C. Memo.
1992–48 (quoting 15 Mertens, Law of Federal Income Taxation, sec. 59.08, at 26 (1989)).15
14Mr. Roddewig’s testimony with respect to how many specialists he relied on is inconsistent.

Note 5 to the table in his written report labeled ‘‘Segregated Cost Analysis: Before Preservation
Easement Maison Blanche Hotel Complex (Ritz-Carlton Hotel)—Building Shell Only—As of De-
cember 29, 1997’’ explains that the terra cotta reproduction cost ‘‘has been estimated based on
calculations from terra cotta specialists.’’ Note 40 to that written report explains: ‘‘The costs
used by us to calculate the reproduction cost of the Maison Blanche exterior were determined
based upon multiple calls with Mr. Pete Pederson of Gladding McBean terra cotta between Feb-
ruary 23 and March 4, 2005.’’ We cannot determine how many terra cotta specialists Mr.
Roddewig consulted. We shall continue to use the term ‘‘specialists’’ although we are uncertain
as to whether there was one or more.
1515 Mertens, Law of Federal Income Taxation, sec. 59.08, at 26 (1989):
A common fallacy in offering opinion evidence is to assume that the opinion is more important
than the facts. To have any persuasive force, the opinion should be expressed by a person quali-
fied in background, experience, and intelligence, and having familiarity with the property and
the valuation problem involved. It should also refer to all the underlying facts upon which an
intelligent judgment of valuation should be based. The facts must corroborate the opinion, or
the opinion will be discounted. [Fn. refs. omitted.]

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Whitehouse I, 131 T.C. at 151–152. We added: ‘‘We need not
rely on the unsupported opinion of an expert witness’’, citing
Holman v. Commissioner, 130 T.C. 170, 213 (2008), aff ’d, 601
F.3d 763 (8th Cir. 2010). Id. at 152. The relevant authority
of the Court of Appeals is in accord. E.g., Guile v. United
States, 422 F.3d 221, 227 (5th Cir. 2005) (‘‘An expert’s
opinion must be supported to provide substantial evidence;
* * * ‘A claim cannot stand or fall on the mere ipse dixit of
a credentialed witness.’ ’’ (quoting Archer v. Warren, 118
S.W.3d 779, 782 (Tex. Ct. App. 2003))). We have reconsidered
and do not believe we erred in questioning, and refusing to
rely on, Mr. Roddewig’s judgment that the enforcement of the
provisions of the servitude doubles the cost of external
obsolescence.
5. Land Value
In moving from his before- to his after-restriction value,
Mr. Roddewig reduced his estimate of the cost of land by $2.5
million because the conveyance had reduced the partner-
ship’s interest in the Maison Blanche-Kress parcel to less
than a fee simple interest and, he believed, the partnership
had lost the right to construct 60 rooms above the Kress
Building. We shall address his second reason infra. In
Whitehouse I, 131 T.C. at 152, we conceded for the sake of
argument that a servitude requiring maintenance of a
building’s facade would survive and affect the value of the
underlying land if that land were wiped clean of the building.
Id. His testimony that the price of each comparable should
be adjusted down by 10% to reflect the effect of the servitude
was supported only by his opinion, which we did not find
persuasive and did not accept. Id. Here, we again cited Hol-
man v. Commissioner, 130 T.C. at 213, signifying that we
need not rely on the unsupported testimony of an expert wit-
ness. Accord Guile, 422 F.3d at 227. Additionally, as with our
consideration of his testimony with respect to external
obsolescence, we lack confidence in his judgment on account
of what we consider to be his overvaluation of the before-
restriction value of the Maison Blanche-Kress parcel. We con-
tinue not to accept his 10% downward adjustments.

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6. Conclusion
We reject Mr. Roddewig’s testimony regarding the value of
the servitude under the reproduction cost approach not only
because that approach is in general problematic for deter-
mining the value of a historic structure (and, in particular,
problematic here, where petitioner has failed to show that
reconstruction, if the Maison Blanche Building were
destroyed, would be a reasonable business venture) but also
because we lack confidence in some of Mr. Roddewig’s unsup-
ported conclusions.
Moreover, we need not (and should not) rely on a substan-
tially flawed and inappropriate valuation method where we
have another method that provides a more accurate valu-
ation of the servitude, as discussed infra.
B. Income Approach
1. Introduction
In Whitehouse I, 131 T.C. at 156, we summed up our
grounds for rejecting petitioner’s income approach to valuing
the servitude as follows: ‘‘The risk of error inherent in the
income approach as applied by Mr. Roddewig in this case,
together with the fact that we have reliable alternative evi-
dence of value arrived at by the comparable sales approach,
is sufficient grounds for us to reject the income approach,
and we do.’’ We have reconsidered and come to the same
conclusion.
2. In General
While on the valuation date the partnership and Ritz-
Carlton had entered into agreements under which (1) the
partnership agreed to renovate the Maison Blanche and
Kress Buildings and (2) Ritz-Carlton agreed to operate a
hotel therein, on that date there had been no renovation and
there was no hotel. Indeed, all that was valuable with
respect to the Maison Blanche Building was its shell, since
the rehabilitation plan for the building was to remove all
interior partitions as well as mechanical and electrical sys-
tems. Id. at 136 n.11. The income approach to valuation is
based on the premise that the subject property’s market
value is measured by the present value of the future income

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its owners can expect to realize. E.g., Marine v. Commis-
sioner, 92 T.C. 958, 983 (1989), aff ’d without published
opinion, 921 F.2d 280 (9th Cir. 1991). The subject property’s
future cashflows are estimated, and the present value of
those cashflows is determined on the basis of an appropriate
risk-adjusted rate of return. See, e.g., Estate of Heck v.
Commissioner, T.C. Memo. 2002–34. Mr. Roddewig described
the process as follows:
In our Income Approach ‘‘before’’ considering the preservation and con-
servation easement, the rehabilitation costs have been based upon the
actual proposed rehabilitation costs as of December of 1997. Operating
revenues, operating costs and expenses, and profits associated with the
proposed Ritz-Carlton Hotel project have been determined based upon
analysis of the actual real estate marketplace in the New Orleans CBD
[Central Business District], and elsewhere, and then inserted into a
computerized discounted cash flow model. The resulting discounted present
value is the price that could be paid for the Maison Blanche Building, the
1950s Addition, and the Kress Building in their deteriorated condition
prior to rehabilitation as of December of 1997, and before considering the
preservation and conservation easement. The result is the most probable
price that a purchaser would be willing to pay for the unrehabilitated
Maison Blanche complex prior to considering the impact of the preserva-
tion easement.

In short, Mr. Roddewig input data to his computer model,
and the output, he represents, is the ‘‘most probable price’’
that a willing buyer would be willing to pay for the Maison
Blanche-Kress parcel sans the servitude. 4
The seemingly mechanical nature of the process should not
obscure the fact that Mr. Roddewig’s estimate of ‘‘the most
probable price’’ is a probabilistic expression (a point estimate)
of value resulting from an analysis of a considerable number
of underlying data. Even if we accept that, according to his
analysis of the data, the model has generated the most prob-
able price that a willing buyer would pay, how much con-
fidence should we place in that estimate? How confident
should we be that the most probable price that a willing
buyer would pay is not substantially less (or more) than the
price indicated by Mr. Roddewig’s model? Many of the data
4 The after-restriction approach is similar, but, as Mr. Roddewig testified, inputting to the

model additional costs and delays due to the burden of the servitude and adjusting capitaliza-
tion and discount rates to reflect new risks associated with imposition of the servitude. The indi-
cated value of the servitude is, of course, the difference between the before- and after-restriction
approaches.

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Mr. Roddewig relied on (e.g., occupancy rates) were as yet
unknown. He relied on industry data for many of his inputs
(e.g., room revenues, food and beverage revenue, telephone
revenue). Some risks are obvious: e.g., the hotel might not be
finished on schedule; 5 occupancy might be less than
expected; the hotel might not fetch $123,942,500 at the end
of 2002 (ignoring the servitude). Moreover, in estimating
construction costs and hotel receipts and expenses alone, Mr.
Roddewig made hundreds of assumptions, involving amounts
both large ($9,904,936 in construction period interest) and
small ($4.50-a-night telephone revenue from occupied rooms),
each carrying with it some risk of error. He has provided us
with no measure of the overall risk of error in his conclusion
of the most probable price that a willing buyer would pay.
Our own calculations, see Whitehouse I, 131 T.C. at 154–156,
show that relatively minor changes in only a few of his
assumptions would have large bottom-line effects. Without
some measure of the overall risk attendant to his model’s
output that we might examine, and with our own conclusions
as to the sensitivity of his model’s output to relatively minor
changes, we were (and remain) hesitant to attach any weight
to that output (i.e., most probable price that a willing buyer
would pay), especially in the light of the availability of com-
parable-sales data as to value. 6
Mr. Argote did not use the income approach. He testified
that, as applied to the Maison Blanche Building, the income
approach relied upon too many assumptions, thus making it
prone to error. He believes (as we determined) that even a
small change in estimated construction costs, the timing of
those costs, the length of time to complete construction, esti-
mated income, estimated expenses, capitalization rate, or dis-
count rate could substantially affect the present value
arrived at using a discounted cashflow analysis.
Petitioner in its supplemental brief points us to cases in
which we approved the income approach to valuing income-
5 And apparently it was not finished on schedule. Mr. Roddewig assumed that construction

would end on December 31, 1999, and the hotel would open the next day, January 1, 2000. Peti-
tioner makes no objection to respondent’s proposed finding of fact that the hotel commenced op-
erations on October 6, 2000, and we have so found.
6 See Institute of Business Appraisers, ‘‘A Deep, Dark Secret’’, May 15, 2009, by Rand Curtiss,

http://67.199.106.48/index/2009/05/15/a-deep-dark-secret/ (last visited October 15, 2012) (sug-
gesting that, when the number of variables in a business valuation increases, the uncertainty
of the value of the business as a whole increases because of the interrelationship of the vari-
ables).

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generating properties. E.g., Gross v. Commissioner, T.C.
Memo. 1999–254 (‘‘When properly applied, a discounted cash-
flow analysis is a reliable tool for financial analysis.’’), aff ’d,
272 F.3d 333 (6th Cir. 2001). Two of the cases that petitioner
refers us to are cases in which we actually ignored the
income approach (applied by at least one appraiser in each
case) in determining the fair market value of an encum-
brance: Dorsey v. Commissioner, T.C. Memo. 1990–242
(preferring acquisition cost to establish the pre-encumbrance
value of the building and reducing it by 10% to reflect the
loss in value attributable to the encumbrance; illustrating in
an appendix how our result was approximately the same as
under the taxpayer’s expert’s income approach), and Hilborn
v. Commissioner, 85 T.C. 677, 698–700 (1985) (relying, in
part, on each expert’s testimony but not placing any weight
on the value arrived at under the income method).
It is true that we have used the income approach (the sub-
division method) to account for the loss of development
potential resulting from the restrictions imposed by a con-
servation easement. E.g., Symington v. Commissioner, 87
T.C. 892 (1986); Trout Ranch, LLC v. Commissioner, T.C.
Memo. 2010–283, aff ’d, 493 Fed. Appx. 944 (10th Cir. 2012);
Clemens v. Commissioner, T.C. Memo. 1992–436. In those
instances, we found that the loss in value due to imposition
of the conservation restriction stemmed from the change in
the number of lots that could be sold, with the number and
value of those lots (determined by the comparable-sales
approach) being the principal points of disagreement. We had
sufficient information from the experts that we were com-
fortable in evaluating and adjusting their analyses to
produce valuations in which we had confidence. See, e.g.,
Symington v. Commissioner, 87 T.C. at 903–904.
Certainly, we are not hostile to the income approach to
determining value, and we have accepted (and applied) it in
determining the value of conservation easements, see, e.g., id.
(subdivision method), although it is not favored if com-
parable-sales data are available, see, e.g., Chertkof v.
Commissioner, 72 T.C. 1113, 1122 (1979), aff ’d, 649 F.2d 264
(4th Cir. 1981). As we said in Whitehouse I, 131 T.C. at 153:
‘‘The usefulness of the income approach diminishes * * * as
the quality of the evidence of the income-producing potential
of the property (usually evidence of its past performance)

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diminishes. It has been judged an unsatisfactory valuation
method for property that does not have a track record of
earnings.’’ See Duncan Indus., Inc. v. Commissioner, 73 T.C.
266, 280 n.13 (1979) (rejecting capitalization-of-income
approach where corporation had just come into existence);
Pittsburgh Terminal Corp. v. Commissioner, 60 T.C. 80, 89
(1973) (rejecting capitalization-of-income approach where coal
fields were not yet developed and operational on date for
valuation), aff ’d without published opinion, 500 F.2d 1400
(3d Cir. 1974); Ambassador Apartments, Inc. v. Commis-
sioner, 50 T.C. 236, 243–244 (1968) (rejecting real estate
valuation based on capitalization-of-income approach in favor
of market value established by recent sales), aff ’d, 406 F.2d
288 (2d Cir. 1969); see also, e.g., Allison v. Ticor Title Ins.
Co., 979 F.2d 1187, 1200 (7th Cir. 1992) (‘‘[T]he law is clear
in Wisconsin that when comparable-sales evidence is avail-
able, income evidence should not be admitted. * * * Income
evidence is generally considered too speculative as it depends
upon too many contingencies to be reliable for determining
fair market value.’’); Winooski Hydroelectric Co. v. Five Acres
of Land, 769 F.2d 79, 82 (2d Cir. 1985) (‘‘On the most basic
level, the future income calculations were too speculative,
since Green Mountain had not operated any business at
Montpelier #4 for over a decade.’’). The Court of Appeals has
also approved a trial court’s excluding income-generating pro-
posals from the consideration of value where the evidence
showed that the proposals were too speculative to contribute
to market value. United States v. Land, 62.50 Acres of Land
More or Less, 953 F.2d 886, 891, 893 (5th Cir. 1992).
What these cases establish is that the reliability of the
income approach depends on the underlying facts (e.g.,
whether there is an ongoing business on the valuation date),
the quality of the evidence, and whether evidence of com-
parable sales was available. We have explained our general
hesitancy with respect to Mr. Roddewig’s model on the basis
of his failure to quantify the risk inherent in the conclusion
he draws from it. Moreover, he did not capitalize the income
of an ongoing business. 7 He identified the property that he
was to value as the shell of the Maison Blanche Building,
7 The Maison Blanche Building did have an income history on the valuation date; Mr.

Roddewig disregarded that history in applying his model to value of the building.

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and, for that property, comparable-sales data were available.
We felt, and still do, that there is simply too much
uncertainty and unquantified risk associated with Mr.
Roddewig’s application of the income approach for us to
accept at face value his value conclusions resulting from that
approach. We do not intend to write a rule for facade cases
in general, nor do we rule out the income approach in some
of those cases; we deal here only with the facts (testimony)
before us.
One significant problem with respect to Mr. Roddewig’s
income approach that is specific to the facts before us is that
a large portion of the change in annual operating costs that
he projected is attributable to annual additions to a ‘‘facade
replacement reserve’’ on the basis of an estimate of terra
cotta replacement costs that we found to be unreliable.
Whitehouse I, 131 T.C. at 150–151, 155. 8 We also faulted Mr.
Roddewig for inadequately explaining, among other costs, an
almost $3 million architect’s fee, approximately $4 million for
a development fee, interest, real estate taxes, ‘‘Etc.’’, a project
management fee of approximately $2.6 million, and a
financing fee of approximately $4.7 million. Finally, we had
a major problem with his failure adequately to explain the
change in his assumed capitalization and discount rates. Id.
at 155. We pointed out that, if we reduce his 0.5% increase
in both his capitalization and discount rates by 0.1% (a 20%
reduction), the value he calculated for the servitude would be
reduced by close to $1 million. Id.
3. Conclusion
To sum up, Mr. Roddewig used a computer model
employing a discounted cashflow analysis to arrive at both
before- and after-restriction present values for the Maison
Blanche-Kress parcel (the difference being his estimate under
the income approach of the value of the servitude). We have
no difficulty with the process. Where we have difficulty is
with petitioner’s call to trust on their face Mr. Roddewig’s
judgments as to values to be input to his model. Certainly
there are risks associated with those values, but we are not
informed as to the magnitude of those risks, either individ-
8 ‘‘Mr. Roddewig estimated the cost of replacing the facade to be $46,719,755, of which the cost

of terra cotta would be $42,025,000.’’ Whitehouse I, 131 T.C. at 155.

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ually or in total. We have also described specific concerns
that we have with certain of the values Mr. Roddewig input
to his model. Together, we think those factors are sufficient
that we need give no weight to his income approach in deter-
mining the value of the servitude.
Finally, there is the fact that, during the trial, petitioner
asked us to take judicial notice of the pending bankruptcy of
the partnership on July 25, 2003, the date the petition was
filed. The bankruptcy proceeding commenced on January 3,
2002, and it was brought under chapter 11 of the U.S. Bank-
ruptcy Code in the U.S. Bankruptcy Court for the Eastern
District of Louisiana (case No. 02–10061). Petitioner ref-
erenced the bankruptcy in support of its claim that, pursuant
to section 7491, the partnership lacked sufficient net worth
such that petitioner was not excluded from shifting the bur-
den of proof to respondent. See sec. 7491(a)(2)(C). And while
subsequent events generally are not considered in fixing fair
market value, they may be considered to the extent that they
were reasonably foreseeable on the date as of which the
value is fixed. E.g., Estate of Gifford v. Commissioner, 88
T.C. 38, 52 (1987). Mr. Argote testified that, ‘‘based upon
what * * * [he] knew in 1997 * * * [,] * * * development of
the Ritz-Carlton was not feasible.’’ 9 That opinion, he added,
was borne out by the fact that full-service hotel projects that
went ahead in the 1990s and up to the mid-2000s ‘‘have gen-
erally gone into bankruptcy’’. While we have no additional
information concerning the partnership’s bankruptcy, the
risk inherent in the Maison Blanche development was, on the
valuation date, apparent to Mr. Argote. The partnership’s
bankruptcy and Mr. Argote’s testimony stand in sharp con-
trast to the rosy pictures generated by Mr. Roddewig’s model,
which showed a positive worth for the Maison Blanche-Kress
parcel both before and after conveyance of the servitude (and
a terminal value of over $100 million on the hypothetical sale
of the parcel after conveyance of the servitude, in 2003). As
9 More fully, he testified:
I had the opportunity in the early 1990’s to do counseling with the Windsor Court Hotel. And
I had been doing appraisals of multiple hotel operations in the * * * [Central Business District],
in Vieux Carre´, from the early 1990s through the 1997 date.
And based upon the costs that had been related to be—that would be incurred in the construc-
tion of the Ritz-Carlton, and the opportunity for them to lease the hotel out at a particular aver-
aged daily rate, it was fairly easy to conclude that at that point in time, the project simply didn’t
make sense.

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stated, we reject Mr. Roddewig’s testimony valuing the
Maison Blanche-Kress parcel under the income approach
because we judge that testimony to be unreliable.
C. Comparable-Sales Approach
1. Introduction
In Whitehouse I, relying exclusively on the comparable-
sales approach, we found the value of the servitude to be
$1,792,301, calculated as follows:

Value of the servitude under comparable-sales
approach

Before-restriction value ................................ $12,092,301
Less after-restriction value ........................... 10,300,000

Value of the servitude ................................... 1,792,301

Putting aside for the moment the question of the effect of
the servitude on the value of the Kress Building, we discern
from petitioner’s supplemental brief two principal concerns
with our application of the comparable-sales approach; viz,
that we rejected Mr. Roddewig’s sales of nonlocal comparable
properties and that we disregarded his determination of the
value of the Maison Blanche-Kress parcel based on dollars
paid per hotel guest room for comparable properties. The
more important of those concerns is the first, because, if we
are right on the first, the second is of no consequence to peti-
tioner, since, considering only local sales, Mr. Roddewig’s
per-room analysis produces a lower value for the Maison
Blanche Building than does his per-square-foot analysis. 10

10 Mr. Roddewig reports a mean adjusted price per square foot of $53.44 for his local

comparables and 530,646 square feet in the Maison Blanche-Kress parcel (not including the po-
tential of any addition to the Kress Building), which indicates a before-restriction value, on a
per-square-foot basis, of $28,357,722. He also reports a mean adjusted price per room of $31,263
for his local comparables and 720 planned rooms (without regard to any rooms to be built above
the Kress Building), which indicates a before-restriction value, on a per-hotel-room basis, of
$22,509,360. He adds that consideration should be given to the addition of 60 rooms to the Kress
Building, which, keeping the price per room at $31,263 but changing the number of planned
rooms to 780, indicates a before-restriction value, on a per-room basis, of $24,385,140. The per-
square-foot analysis still produces a higher value for the Maison Blanche-Kress parcel.

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2. Disregard of Sales of Nonlocal Comparable Properties
Mr. Roddewig testified that he included nonlocal
comparables because none of the buildings that he found in
downtown New Orleans were similar to the Maison Blanche-
Kress parcel in size or luxury hotel market orientation. He
added: ‘‘ ‘Buildings purchased for rehabilitation into first
class luxury hotels trade in a national marketplace, so it is
appropriate to analyze sales in other cities for purposes of
establishing the value of the Maison Blanche Hotel Complex
by the Sales Comparison Approach.’ ’’ Whitehouse I, 131 T.C.
at 157.
Mr. Argote saw no need for nonlocal comparables. While he
agreed that, occasionally, if there are insufficient local sales,
an appraiser has to look outside the location of the subject
property for comparables, he thought there was an adequate
number of local comparable properties. Id. And, indeed, Mr.
Roddewig did identify five local sales of comparable prop-
erties; Mr. Argote believed that there were nine that Mr.
Roddewig should have considered. Id. at 158.
We rejected Mr. Roddewig’s nonlocal comparables for a
number of reasons. First, we expressed our preference for
local comparables, stating: ‘‘The reason is simply that loca-
tion plays a huge role in determining the desirability, and,
thus, the value of real estate. We reduce substantially the
risk of error in employing the comparable-sales approach if,
on account of proximity, we can eliminate (or reduce the
significance of) location as a distinguishing factor.’’ Id. at
157–158. The Court of Appeals has also recognized the link
between proximity and probative value: ‘‘The more com-
parable a sale is in characteristics, proximity, and time, the
more probative it is of value.’’ Estate of Jameson v. Commis-
sioner, 267 F.3d 366, 373 (5th Cir. 2001) (emphasis added),
vacating and remanding T.C. Memo. 1999–43. We found the
risk of relying on Mr. Roddewig’s nonlocal comparables to be
significant because the adjusted values he determined for his
nonlocal properties were significantly higher than the
adjusted values he determined for his local properties, ‘‘64
percent higher on a square footage basis and at least double
on a per room basis’’. Whitehouse I, 131 T.C. at 158. Those
large variances from the local real estate market underscore
the lack of comparability of the nonlocal properties that Mr.

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Roddewig chose. Moreover, there were at least five (in Mr.
Roddewig’s opinion) and as many as nine (in Mr. Argote’s
opinion) local sales of comparable properties for which the
risk of proximity disparity was low, and the addition of Mr.
Roddewig’s nonlocal comparables would, by increasing the
risk of proximity disparity, only decrease the probability of
an accurate valuation of the Maison Blanche Building, unless
some characteristic of those nonlocal sales sufficiently
increased that probability. We did not believe that it did,
adding:
Nor are we convinced that it was appropriate to take nonlocal sales into
account because of his claim that buildings purchased for rehabilitation
into first class luxury hotels trade in a national marketplace. He [Mr.
Roddewig] had no statistics supporting that claim, nor did he have evi-
dence of any competition for the Maison Blanche Building, which, 2 years
before the valuation date, was purchased for the relatively moderate price
of $6.625 million. [Id.; fn. ref. omitted.]

3. Highest and Best Use
Mr. Roddewig looked to nonlocal comparables, and he
made price point adjustments for his comparables (adjusting
for the higher room rates expected at a Ritz-Carlton Hotel),
because he determined that the highest and best use of the
Maison Blanche-Kress parcel before the conveyance was a
mixed use development, including a Ritz-Carlton Hotel with
512 rooms (60 of them above the Kress Building), an addi-
tional all-suites hotel with approximately 268 rooms, and
retail use on the first two floors and mezzanine of the Maison
Blanche Building (for short, luxury hotel development). Id. at
130–131. Mr. Argote determined that the highest and best
use of the Maison Blanche Building both before and after the
conveyance was as a hotel (not necessarily a Ritz-Carlton
Hotel) with retail space (for short, a nonluxury hotel develop-
ment). Id.
The Court of Appeals found inadequate our findings with
respect to highest and best use:
As stated, Whitehouse contends the highest and best use of the Maison
Blanche and Kress buildings was as a Ritz-Carlton (per Roddewig’s
opinion), not as a non-luxury hotel (per Argote’s opinion). The tax court did
not explicitly rule on this issue, but it did not accept Roddewig’s opinion
on highest and best use. Accordingly, on this issue, the tax court’s decision
can be construed in two ways: even if the highest and best use was as a

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Ritz-Carlton, that had no effect on the property’s value; or, a non-luxury
hotel was the highest and best use. * * * [Whitehouse II, 615 F.3d at 335–
336.]

The Court of Appeals is correct that we did not explicitly
decide whether the highest and best use of the Maison
Blanche-Kress parcel was as a luxury hotel or as a nonluxury
hotel. What we did decide was that Mr. Roddewig erred in
his opinion that the highest and best use of the Maison
Blanche-Kress parcel differed after the conveyance because
the servitude prevented the partnership from adding stories
to the Kress Building. Whitehouse I, 131 T.C. at 135. We
address that conclusion infra in section III. of this report.
We of course agree with the Court of Appeals that finding
a property’s highest and best use is critical for determining
its fair market value. Whitehouse II, 615 F.3d at 335 (citing
Olson v. United States, 292 U.S. 246, 255 (1934)). Indeed, we
have said: ‘‘The realistic, objective potential uses for property
control the valuation thereof.’’ Stanley Works v. Commis-
sioner, 87 T.C. at 400. Nevertheless, we are not compelled to
choose between Messrs. Roddewig’s and Argote’s competing
opinions as to highest and best use of the Maison Blanche
Building either as a luxury or as a nonluxury hotel. The term
‘‘highest and best use’’ may be defined as ‘‘[t]he reasonably
probable and legal use of vacant land or an improved prop-
erty that is physically possible, appropriately supported, and
financially feasible and that results in the highest value.’’
Appraisal Institute, The Appraisal of Real Estate 277–278
(13th ed. 2008). But, and this is very important, the highest
and best use of property does not itself identify the fair
market value of the property: It ‘‘forms the foundation for the
opinion of value.’’ Id. at 295. 11 As the Supreme Court
explained, the determination of fair market value incor-
porates the highest and best use of a piece of property only
if the demand for that use will affect the market price:
[M]arket value fairly determined * * * does not depend upon the uses to
which * * * [the owner] has devoted his land but is to be arrived at upon
just consideration of all the uses for which it is suitable. The highest and
most profitable use for which the property is adaptable and needed or
11 More extensively: ‘‘The highest and best use is shaped by the competitive forces within the

market where the property is located and provides the foundation for a thorough investigation
of the competitive position of the property in the minds of market participants.’’ Appraisal Insti-
tute, The Appraisal of Real Estate 277 (13th ed. 2008).

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likely to be needed in the reasonably near future is to be considered, not
necessarily as the measure of value, but to the full extent that the prospect
of demand for such use affects the market value * * * [Olson, 292 U.S. at
255; emphasis added.]

Accordingly, as the Court of Appeals has explained: ‘‘Even if
* * * a potential use is profitable and * * * the property is
adaptable for that use, that use is not necessarily the
measure of the value of the property. Instead, it is to be
considered to the extent the prospect of demand for the use
affects market value.’’ Land, 62.50 Acres of Land More or
Less, 953 F.2d at 890 (citing Olson, 292 U.S. at 255); see also
Boltar, LLC v. Commissioner, 136 T.C. 326, 336 (2011) (‘‘The
concept of ‘highest and best use’ is an element in the deter-
mination of fair market value, but it does not eliminate the
requirement that a hypothetical willing buyer would pur-
chase the subject property for this indicated value.’’).
4. Second-Best Use
The point to be taken is that, although the highest and
best use of property may determine a ceiling on how much
a willing buyer would pay for the property, it does not nec-
essarily determine a floor on how little a willing seller would
accept. In other words, the hypothetical willing buyer and
the hypothetical willing seller who populate our standard
definition of fair market value 12 will not invariably conclude
their negotiation over price at a price reflecting the value of
the property at its highest and best use. In Van Zelst v.
Commissioner, 100 F.3d 1259 (7th Cir. 1996), aff ’g T.C.
Memo. 1995–396, Judge Easterbrook, writing for the court,
explained this commonsense point by reference to auction
theory. 13 He rejected as ‘‘nonsense on its own terms’’ an
appraisal, used to support a substantial charitable contribu-
tion deduction for the contribution to the United States of
lands in the Alaskan wilderness, that was based on the
theory that the property might be developed as a luxury
resort lodge. Id. at 1262. He explained: ‘‘It should not have
required the award of the 1996 Nobel Prize in Economics to
12 ‘‘The fair market value is the price at which the property would change hands between a

willing buyer and a willing seller, neither being under any compulsion to buy or sell and both
having reasonable knowledge of relevant facts.’’ Sec. 1.170A–1(c)(2), Income Tax Regs.
13 We borrow here (and in other places) from the appellee’s brief in this case before the Court

of Appeals.

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William Vickrey, a pioneer of auction theory, to remind
people that the market price of an asset depends on the
second-most-productive use to which it can be put.’’ Id. (citing
R. Preston McFee & John McMillan, ‘‘Auctions and Bidding’’,
25 J. Econ. Lit. 699 (1987)). He further explained that the
equilibrium price at which the willing buyer and the willing
seller would meet would be somewhere between the value of
the property taking into account its most productive use (i.e.,
its highest and best use) and the value of the property taking
into account its second most profitable use. Id. at 1262–1263.
If there are many potential buyers in the market for the
property, the equilibrium price would be closer to the price
determined by taking into account its most productive use,
and, if there are few potential buyers in the market for the
property, it would be closer to the price determined by taking
into account its second most productive use. Id. Judge
Easterbrook’s discussion of the value of land in Alaska—
which, as here, the taxpayer claimed, could be used for the
development of a luxury hotel—is helpful in resolving the
problem before us; viz, the value of a property in New
Orleans that might be used to develop a luxury hotel:
Suppose three parcels of private land in the Park are equally suitable to
be the site of a resort that will bring its developer $2 million after costs
of construction and operation. How much will the developer pay for the
land? That depends on what else the owners can do with their land, as the
developer will shop for the lowest price. Suppose Parcel A has a vein of
ore with a present value of $650,000, and Parcels B and C, which lack
minerals, are suitable only for subsistence hunting and fishing (value
$10,000). The owner of Parcel A will not sell for less than $650,000, but
the owners of Parcels B and C will sell for anything over $10,000. The
developer will not pay $650,000 to the owner of Parcel A, when he can get
land for so much less elsewhere, so Parcel A is worth only $650,000 as the
value of its second-best-use, a mine. If there were no Parcel C, the devel-
oper and the owner of Parcel B would reach a deal in the range between
$10,000 and $650,000: the developer never pays more than $650,000 (for
he can turn to Parcel A), and the owner never takes less than $10,000 (for
he can keep the land in its current use). When there is a Parcel C, a threat
to buy it instead of Parcel B helps the developer chisel the price down,
unless the owners collude. As the number of available sites rises, the possi-
bility of collusion declines. When there are hundreds of potential sites (as
there are in the Park and Preserve), the price the developer must pay falls
to the competitive level. To put this otherwise, land is not a scarce
resource in these mountains; financing and entrepreneurship are the
scarce ingredients, so they will capture the economic return of resort
development. Yet the Hawley Group’s appraisal attributed to the Nelson

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334 139 UNITED STATES TAX COURT REPORTS (304)

Mine 100 percent of the (potential) economic profit of a resort development.
It did not offer a rationale for that allocation. At oral argument Van Zelst’s
lawyer tried to supply one by saying that the number of potential resort-
mine combinations in the vicinity is small, but for reasons we have already
explained even a ‘‘small’’ number of rivals allows the developer to capture
the returns * * *. [Van Zelst v. Commissioner, 100 F.3d at 1262–1263.]

See also Caracci v. Commissioner, 456 F.3d 444, 459 (5th Cir.
2006) (citing with approval that discussion of comparable
properties), rev’g 118 T.C. 379 (2002).
Even if Mr. Roddewig is right that the highest and best
use of the Maison Blanche-Kress parcel before the convey-
ance to PRC was a luxury hotel development and that
‘‘[b]uildings purchased for rehabilitation into first class
luxury hotels trade in a national marketplace’’, that does not
necessarily lead to the conclusion that the fair market value
of the parcel is much (if indeed any) greater than the price
that would be predicted for the parcel taking into account its
second best use; i.e., development as a nonluxury hotel. By
his own admission, what Mr. Roddewig valued was the shell
of a building, which he thought could profitably be developed
into a hotel: ‘‘We have concluded that the highest and best
use of the Maison Blanche Building * * * [before convey-
ance] is rehabilitation of the ‘shell’ structure for hotel use
with retailing on the first and second floor[s]’’. He identified
as comparables five local buildings which he described as
‘‘downtown New Orleans buildings purchased as shells for
adaptive reuse as hotels.’’ He cautioned, however, that ‘‘none
were similar to the Maison Blanche hotel complex in size and
luxury hotel market orientation.’’ The size dissimilarity is
easily adjusted for. The second dissimilarity appears inappro-
priate, however, since, admittedly, he was comparing
building shells, and, for the shell of a building, similarity is
determined by development potential, not by actual develop-
ment. To reflect an after-development dissimilarity between
the Maison Blanche-Kress parcel and the comparables, he
made his so-called hotel price point adjustments, whereby he
adjusted (upward) the reported sale price of each comparable
building to reflect the higher room rates expected at a Ritz-
Carlton Hotel over the actual rates quoted for rooms at the
comparable buildings, after their development into hotels.
While apparently none of the comparables was developed
into a luxury hotel, petitioner makes no argument that, when

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considered in their shell-state condition, luxury hotel
development was precluded for any of the comparables. The
hotel price point adjustments therefore are beside the point.
So long as the comparables when considered as shell
buildings had a potential for hotel development (luxury or
not) similar to that of the Maison Blanche Building when
considered as a shell building, the comparables’ actual
development as nonluxury hotels is irrelevant. Petitioner
wants to ascribe to the shell of the Maison Blanche Building
some difference (‘‘luxury hotel market orientation’’) that it
has not shown exists. Luxury versus nonluxury might be a
relevant distinction when applying the comparable-sales
approach to valuing renovated properties (or when applying
the income approach to valuing improved or unimproved real
property), but even in those circumstances there is a hotel
business whose value must be differentiated from the value
of the real property.
Moreover, petitioner has failed to show that, on the valu-
ation date, there was any scarcity of buildings in New
Orleans suitable for development as luxury hotels. Only if
there were sufficient scarcity would the partnership, consid-
ering it as the landlord of the Maison Blanche Building, cap-
ture a piece of the economic return to luxury hotel develop-
ment of the building’s shell. But, as Judge Easterbrook
points out, even a small number of rivals allows the devel-
oper (and not the property owner) to capture the return. Van
Zelst v. Commissioner, 100 F.3d at 1263. Mr. Roddewig
identified five local comparables, while Mr. Argote believed
that there were nine. Local rivals, therefore, were not scarce,
and, as to the intensity of demand, Mr. Roddewig had no
‘‘evidence of any competition for the Maison Blanche
Building, which, 2 years before the valuation date, was pur-
chased for the relatively moderate price of $6.625 million.’’
Whitehouse I, 131 T.C. at 158. Since it was petitioner’s bur-
den to establish otherwise, and since petitioner did not do so,
we assume that, on the valuation date, demand also was
weak.
Finally, Mr. Roddewig did not justify his use of nonlocal
comparables and his price point adjustments on competitive
grounds (i.e., that, on the valuation date, it was a seller’s
market for properties comparable to the Maison Blanche
Building) but on the ground that buyers in the marketplace

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for shell buildings suitable for development into luxury
hotels ‘‘will pay a premium without trying to think about
what the local buyers will pay.’’ Whitehouse I, 131 T.C. at
160. Even in the absence of competing bids, that is, he testi-
fied that developers of luxury hotels will leave money on the
table by paying more than the local market would demand
for the property. Id. Put simply, that defies common sense.
Moreover, it contradicts a basic tenet of the fair market
value paradigm; viz, that, with respect to both the hypo-
thetical buyer and the hypothetical seller, ‘‘each is a rational
economic actor, that is, each seeks to maximize his advan-
tage in the context of the market that exists at the date of
valuation.’’ Estate of Jameson v. Commissioner, 267 F.3d at
370; see also Estate of Newhouse v. Commissioner, 94 T.C.
193, 217–218 (1990). The rational economic buyer’s advan-
tage is that the sellers’ properties are worth more to him
than they are to the sellers, and he maximizes that advan-
tage by acquiring a seller’s property at the lowest cost that
seller will accept. 14
5. Conclusion
The highest and best use of the Maison Blanche-Kress
parcel on the valuation date may have been luxury hotel
development; but even if we were to accept that as a fact, it
does not rule out the possibility that the value of the parcel
on that date was dictated by its second best use (which, we
assume, is as a nonluxury hotel). We have Mr. Roddewig’s
testimony that, on the valuation date, the market for the
parcel was national and that luxury hotel developers have
deep pockets and do not stoop to bargain, but we have
rejected that. While the fair market value of the parcel may
have fallen somewhere between its value determined by its
highest and best use and its value determined by its second
best use, we have no evidence, or the tools, to determine
what that might be. In Whitehouse I, 131 T.C. at 158–160,
we disregarded Mr. Roddewig’s nonlocal comparables and his
price point adjustments, and we determined the value of the
14 That the partnership itself might have been unwilling to sell the Maison Blanche Building

shell for less than a price reflecting its highest and best use is beside the point, for the definition
of fair market value assumes a hypothetical seller as well as a hypothetical buyer. Caracci v.
Commissioner, 456 F.3d 444, 456 (5th Cir. 2006), rev’g 118 T.C. 379 (2002); sec. 1.170A–1(c)(2),
Income Tax Regs.

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Maison Blanche Building on the basis of only local
comparables, without any price point adjustments. We con-
tinue to believe that that was the proper course. In effect,
then, we are accepting Mr. Argote’s methodology and his
view that the value of the subject property under the com-
parable-sales approach is to be determined on the basis of
sales of buildings suitable for conversion into hotels—luxury
or not. The properties that both expert witnesses chose rep-
resent the market value of shell buildings of comparable age,
character, and quality that were suitable for conversion to
hotels. They are, therefore, representative of how the market
would have valued the Maison Blanche Building at the time
of the donation. We do not need to choose between the two
experts’ opinions of highest and best use, since, even if we
were to agree with Mr. Roddewig, it would make no dif-
ference. 15
III. Effect of the Servitude
A. Introduction
We have summarized the terms of the conveyance above
and have set it out in full (excluding exhibits) in the
15 Mr. Roddewig also believed that the highest and best use of the Maison Blanche-Kress par-

cel would involve the addition of 60 rooms above the Kress Building. Since we reject his repro-
duction cost and income approaches to valuing the servitude for reasons not directly implicating
the addition of those 60 rooms, we do not consider in connection with those approaches whether
the parcel’s highest and best use involved that addition. Nor for the reason set forth supra note
10 do we need to consider it in connection with the comparable-sales approach. In any event,
petitioner has failed to convince us that a nine-story, 60-room addition above the Kress Building
would have been the highest and best use of the property. All we have is Mr. Roddewig’s ‘‘anal-
ysis’’, made in conjunction with the architects, ‘‘indicat[ing] that up to nine additional floors
could be built atop the Kress Building.’’ Petitioner has not translated that unquantified possi-
bility into a quantified probability. There is more to determining whether something is prac-
ticable than determining that it is possible. See, e.g., Olson v. United States, 292 U.S. 246, 257
(1934) (‘‘Elements affecting value that depend upon events or combinations of occurrences which,
while within the realm of possibility, are not fairly shown to be reasonably probable, should be
excluded from consideration, for that would be to allow mere speculation and conjecture to be-
come a guide for the ascertainment of value—a thing to be condemned * * * in judicial ascer-
tainment of truth.’’). Petitioner has failed to provide convincing evidence that an addition atop
the Kress Building as part of the development of the Maison Blanche-Kress parcel was part of
the highest and best use of the parcel. It is Mr. Roddewig’s conjecture, based upon anecdotal
information, that the City would have permitted the floor area ratio to increase even more than
the City had already specially excepted. Even if the City had approved additional density, the
record contains only rough architectural drawings. Beyond that there is nothing that shows this
nine-story addition would have been physically possible, or that it would not have been cost pro-
hibitive. Or, indeed, that Ritz-Carlton would have welcomed such an addition. The partnership
and Ritz-Carlton agreed in a Pre-Commencement Agreement to construct and operate a 437-
room hotel. We do not know whether Ritz-Carlton would have approved the additional rooms
considering that they would have been restricted to light wells.

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appendix. The six-story Kress Building is adjacent to the
Maison Blanche Building on Canal Street. According to peti-
tioner, in order to protect that portion of a common wall
rising above the Kress Building, the conveyance prevents the
partnership ‘‘from building additional stories atop the Kress
Building and from selling the Kress Building
unencumbered.’’ In Whitehouse I, 131 T.C. at 132, we began
our discussion of the conveyance by noting that petitioner
described the partnership’s risk from building above the
Kress Building or selling the Kress Building ‘‘unencumbered’’
as the risk of being sued by PRC for breach of contract. Peti-
tioner conceded that no portion of the protected facade is
actually located on the Kress Building. Moreover, neither the
definition of ‘‘improvement’’ nor the definition of ‘‘property’’
in the conveyance includes the Kress Building. Id. We found
that the conveyance creates no charge on (i.e., does not bur-
den) the Kress Building, id. at 134, and the Court of Appeals
agreed with us that the conveyance does not burden the
Kress Building, Whitehouse II, 615 F.3d at 337. We contin-
ued:
Petitioner has therefore failed to prove that, by the conveyance, and pursu-
ant to La. Rev. Stat. Ann. sec. 9:1252 (1991), the partnership granted PRC
a perpetual real right (servitude) of any extent in the Kress Building.
While the partnership may have obligated itself personally to maintain a
view of the Maison Blanche Building, petitioner has failed to show how
that promise binds anyone who does not undertake it * * * [Whitehouse I,
131 T.C. at 134–135; emphasis added.]

Implicit in the emphasized language is our conclusion that,
not only did the servitude not burden the Kress Building, but
it did not impose any obligation on the partnership not to
build atop it so as to block views of the Maison Blanche
Building’s facade. That is not to say that the partnership had
not personally obligated itself not to do so, but we did not
read the servitude to include that obligation. And that is an
important distinction. All agree that the servitude constitutes
a perpetual conservation restriction. 16 The Louisiana statute
16 While sec. 170(a) allows a deduction for any charitable contribution, sec. 170(f) denies a

charitable contribution deduction for certain contributions of partial interests in property unless,
among other exceptions, the contribution of the partial interest is a qualified conservation con-
tribution. Sec. 170(f)(3)(B)(iii). ‘‘A qualified conservation contribution is the contribution of a
qualified real property interest to a qualified organization exclusively for conservation pur-
poses.’’ Sec. 1.170A–14(a), Income Tax Regs. ‘‘A ‘perpetual conservation restriction’ is a qualified
real property interest.’’ Sec. 1.170A–14(b)(2), Income Tax Regs. ‘‘A ‘perpetual conservation re-

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pursuant to which the servitude was created, La. Rev. Stat.
Ann. sec. 9:1252, specifies that a real right created pursuant
to the section ‘‘shall be effective against third parties when
filed for registry in the conveyance records of the parish in
which the immovable property is located.’’ La. Rev. Stat.
Ann. sec. 9:1252, C. That, the pertinent regulations recog-
nize, is sufficient to conclude that the servitude is enforce-
able in perpetuity:
In the case of any donation under this section, any interest in the property
retained by the donor (and the donor’s successors in interest) must be sub-
ject to legally enforceable restrictions (for example, by recordation in the
land records of the jurisdiction in which the property is located) that will
prevent uses of the retained interest inconsistent with the conservation
purposes of the donation. * * * [Sec. 1.170A–14(g)(1), Income Tax Regs.
(general rule under heading ‘‘Enforceable in perpetuity’’).]

Thus, if the partnership’s supposed obligation with respect to
the Kress Building is not within the burdens or obligations
constituting the servitude, 17 then, unless petitioner can
otherwise show us that the obligation is enforceable in per-
petuity, 18 it fails as a perpetual conservation restriction, and
it cannot be taken into account in determining the amount
of the partnership’s charitable contribution deduction on
account of its December 29, 1997, conveyance of certain
rights in the Maison Blanche Building to PRC. That is not to
say, of course, that the burden of the supposed obligation,
which has no apparent enforceability against successors in
ownership to the building, did not reduce the value of the
contiguous Maison Blanche and Kress Buildings; but unless
the obligation is, or constitutes part of, a perpetual conserva-
tion restriction, that reduction in value cannot be counted as
part of qualified conservation contribution. See sec. 1.170A–
14(h)(3), Income Tax Regs. Because petitioner failed to show
us that the partnership’s supposed obligation not to build
atop the Kress Building is enforceable against any successor
in interest, we concluded in Whitehouse I that the supposed
obligation, if enforceable, is not enforceable in perpetuity. See
striction’ is a restriction granted in perpetuity on the use which may be made of real property—
including, an easement or other interest in real property that under state law has attributes
similar to an easement (e.g., a restrictive covenant or equitable servitude).’’ Id.
17 The real right established pursuant to La. Rev. Stat. Ann. sec. 9:1252 may not only burden

property, but it ‘‘may additionally obligate the owner of the * * * property as is necessary to
fully execute the rights granted herein.’’ La. Rev. Stat. Ann. sec. 9:1252, A.
18 Petitioner has not done so.

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sec. 1.170A–14(g)(1), Income Tax Regs. Therefore, we dis-
regarded it in determining the value of the servitude and,
consequently, the amount of the partnership’s charitable con-
tribution deduction.
We are aware that, in Whitehouse II, 615 F.3d at 337, the
Court of Appeals stated: ‘‘[B]ecause of the easement,
Whitehouse could not build on top of the Kress building’’. We
are also mindful that, once a case has been decided on appeal
and a mandate issued, a lower court is not free to alter the
mandate of the appellate court, although it is free to decide
matters that are left open by the mandate. Barrett v.
Thomas, 809 F.2d 1151, 1154 (5th Cir. 1987) (citing In re
Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895)). Because
the distinction we have drawn between the partnership’s per-
sonal obligation not to block views of the Maison Blanche
Building and its burdens and obligations undertaken pursu-
ant to the real right created by the servitude was not consid-
ered by the Court of Appeals, we see some daylight to again
examine the conveyance to see whether it imposes an obliga-
tion on the partnership not to block views of the Maison
Blanche Building. We believe that type of analysis is what
the Court of Appeals intended when it directed this Court to
reconsider the effect of the servitude on the fair market
value. Whitehouse II, 615 F.3d at 340. If we overstep our
authority, we apologize. We shall recalculate the value of the
servitude on the assumptions that, in fact, it does obligate
the partnership not to build atop the Kress Building and that
separate ownership of the Maison Blanche and Kress
Buildings is unlikely.
B. The Conveyance
1. Introduction
We look to Louisiana law in interpreting the conveyance.
Id. at 329 (citing Adams v. United States, 218 F.3d 383, 386
(5th Cir. 2000) (‘‘To arrive at a reasonable conclusion
regarding the value of the property at issue * * *, one must
first determine the rights afforded to the owner of such prop-
erty by the applicable state law.’’)). By its terms, and pursu-
ant to La. Rev. Stat. Ann. sec. 9:1252, the conveyance pur-
ports to transfer a perpetual real right ‘‘in and to certain
exterior surfaces of the * * * [Maison Blanche Building]’’ to

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PRC. La. Rev. Stat. Ann. sec. 9:1252, A. provides for the cre-
ation of a perpetual real right burdening the whole or any
part of immovable property, including its facade, in favor of
an entity formed exclusively for certain public purposes.
While the provision is found in the statute among provisions
headed ‘‘Predial Servitudes’’ (La. Rev. Stat. Ann. title 9, code
book II, code title IV), the perpetual real right created by the
provision has aspects of a right of use, a form of personal ser-
vitude. See Whitehouse I, 131 T.C. at 132–133. Petitioner
argues that, in enacting La. Rev. Stat. Ann. sec. 9:1252, the
legislature intended to create a special type of predial ser-
vitude, one that has characteristics of both predial and per-
sonal servitudes. As we discussed in Whitehouse I, 131 T.C.
at 133–134, whether most resembling a right of use or a
predial servitude, the perpetual real right created by the
provision is subject to the interpretive rules applicable to
predial servitudes. Thus, for instance: ‘‘Doubt as to the exist-
ence, extent, or manner of exercise of a predial servitude
shall be resolved in favor of the servient estate.’’ La. Civ.
Code Ann. art. 730 (2008). ‘‘[T]he proper interpretation of an
ambiguous instrument is that which least restricts the
ownership of the land’’. Id. cmt. b. (Revision Comments—
1977) (noting that Louisiana courts have applied this rule ‘‘in
a variety of contexts’’). One illustrative case cited in the com-
ment is Whitehall Oil Co. v. Heard, 197 So. 2d 672 (La. Ct.
App. 1967). There, the court was faced with construing a
partition agreement to determine whether it created separate
servitudes over each of several contiguous tracts or whether
it created a single servitude over all of them. Id. at 676. The
court stated that the answer depended on the intent of the
parties to the agreement determined under principles of con-
tract construction. Id. The court apparently found no role for
parol evidence, stating: ‘‘[T]his determinative question is to
be decided by the intention of the parties as reflected by the
partition agreement.’’ Id.; see also Robert Inv. Co., Inc. v.
Eastbank, Inc., 496 So. 2d 465, 472 (La. Ct. App. 1986)
(‘‘Parol evidence is not admissible to modify a written
instrument pertaining to the establishment of a predial ser-
vitude.’’).
With these rules in mind, we approach the conveyance.

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2. Parties’ Arguments
Because language prohibiting the partnership from
building atop the Kress Building is not apparent to us, we
asked the parties to identify language in the conveyance
either prohibiting the owner of the Maison Blanche Building
from building atop the Kress Building or otherwise obscuring
a view of the Maison Blanche Building. Respondent could
identify no such language. Petitioner did not directly answer
our request. 19 Rather, petitioner first references language in
the first numbered paragraph of the conveyance identifying
a portion of the facade:
exterior walls of the Lower Stories which are visible from Canal and Dau-
phine Streets, the exterior portion of the Improvement above the Lower
Stories which is not covered by the Upper Stories, the exterior walls of the
Upper Stories which are visible from Canal, Burgundy, Iberville, and Dau-
phine Streets[.] * * *

Petitioner then references the eleventh ‘‘whereas’’ clause in
the preamble of the conveyance, in which the partnership
states its ‘‘desire[ ] to donate, grant, transfer and convey to
* * * [PRC] * * * a scenic, open space and architectural
facade servitude’’. Conflating those two provisions, petitioner
argues that the combined language ‘‘creates a servitude of
view.’’ Petitioner then refers us to La. Civ. Code Ann. art.
701, Servitude of view (2008), which provides: ‘‘The servitude
of view is the right by which the owner of the dominant
estate enjoys a view; this includes the right to prevent the
raising of constructions on the servient estate that would
obstruct the view.’’
3. Discussion
Petitioner’s reliance on the preamble of the conveyance is
misplaced. ‘‘Generally, a preamble does not create rights
beyond those conveyed by the contract’s operative terms.’’
Chevron U.S.A., Inc. v. Santa Fe Snyder Corp., 69 Fed. Appx.
658 (5th Cir. 2003) (citing Grynberg v. FERC, 71 F.3d 413,
416 (D.C. Cir. 1995) (‘‘[I]t is standard contract law that a
Whereas clause, while sometimes useful as an aid to
19 Although, in the introduction to its supplemental brief, petitioner assures us that it has re-

sponded ‘‘to each and every one of the matters as to which * * * [the] Court has requested sup-
plemental briefing.’’

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interpretation, ‘cannot create any right beyond those arising
from the operative terms of the document.’ ’’)); see also
Succession of Ramp, 212 So. 2d 419, 423 (La. 1968). We
shall, therefore, first set aside the portion of the preamble
that petitioner relies on and consider the operative terms of
the conveyance.
The conveyance (set out in the appendix) establishes in PRC
a real right (i.e., the servitude) ‘‘in and to certain exterior
surfaces of the Improvement [i.e., the improvement being the
Maison Blanche Building and referenced exterior surfaces
constituting the building’s facade]’’. In furtherance of the ser-
vitude, the partnership agrees ‘‘to do (and refrain from
doing)’’ each of certain listed things. The first paragraph fol-
lowing that prefatory language describes the facade and, as
highlighted, is the object of petitioner’s claimed servitude of
view:
1. The exterior surfaces of the Improvement subject to this Servitude are
the exterior walls of the Lower Stories which are visible from Canal and
Dauphine Streets, the exterior portion of the Improvement above the Lower
Stories which is not covered by the Upper Stories, the exterior walls of the
Upper Stories which are visible from Canal, Burgundy, Iberville, and Dau-
phine Streets, and the roof of the Upper Stories * * * (the ‘‘Facade’’). In
the event of uncertainty, the exterior surfaces of the Improvement visible
in the photographs in Exhibit C shall control.

Other operative provisions of the conveyance referenced by
petitioner in passing that may be relevant to establishing the
partnership’s claimed duty not to build atop the Kress
Building are as follows:
2. Donee acknowledges that Owner has provided to Donee Plans dated
August 7, 1997, (the ‘‘Plans’’) pursuant to which Owner intends to renovate
the Improvement, including the Facade, and that such renovation and
rehabilitation have been approved by Donee, provided such work is in
compliance with the Plans. * * * Owner further acknowledges and agrees
that in the event any changes or modifications are made to the Plans
which affect the Facade, Owner shall first obtain the prior written
approval of Donee before any such changes or modifications are made.
3. Owner agrees at all times to preserve and maintain the Facade in a
good and sound state of repair.
4. Without the express written permission of the Donee, its successors
or assigns, signed by a duly authorized representative thereof, based upon
written plans submitted by Owner to Donee, no construction, change,
alteration, remodeling, renovation, or any other thing shall be undertaken
by Owner or permitted to be undertaken in or to the Facade, which would

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affect either the height, or alter the exterior of the Facade or the appear-
ance of the Facade, other than as shown on the Plans * * *

The three paragraphs address the partnership’s then-
existing plans to renovate the Maison Blanche Building, its
obligation to preserve and maintain the facade, and its rights
to alter the facade. Nowhere in these three paragraphs is
there any specific prohibition on building atop the Kress
Building. The first of the three paragraphs addresses the
partnership’s plans (plans) to renovate ‘‘the Improvement’’,
which, it must be remembered, is a defined term encom-
passing only the Maison Blanche Building (and not the Kress
Building). Indeed, the partnership had not as of the date of
the plans (August 7, 1997) acquired the Kress Building; and,
while the Kress Building is shown on some sheets of the
plans, it is labeled ‘‘Future Donation’’ and ‘‘To Be Acquired
at a Later Date’’. The paragraph requires the partnership to
secure PRC’s approval if the partnership wished to change or
modify the plans; but, since the plans involved only renova-
tion of the Maison Blanche Building, the requirement in the
paragraph to obtain approval for a change in plans would
have no consequence for any plan by the partnership with
respect to the Kress Building.
The second of the three paragraphs, whereby the partner-
ship agrees to preserve and maintain the facade, does not
bar the partnership from building atop the Kress building.
The third of the three paragraphs, establishing generally
PRC’s right to approve changes to the facade, is the most
likely paragraph in which to look for such restrictions. The
paragraph does condition a broad range of activities on
obtaining PRC’s written permission; viz, ‘‘construction,
change, alteration, remodeling, renovation, or any other
thing’’. But PRC’s written permission must be obtained for
any such activity only if (1) the activity is undertaken ‘‘in or
to’’ the facade and (2) as pertinent, the activity would affect
the height of the facade or alter either its exterior or appear-
ance. And while it might be argued that constructing addi-
tional stories atop the Kress Building could change (block)
the appearance of the facade to a person looking up at the
facade from the street in front of, or on the side of, the
heightened Kress Building, such construction would not in

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normal speech be ‘‘in or to’’ the facade and, thus, would not
require permission from PRC.
We do not find in the operative terms of the conveyance
any prohibition restricting the partnership from building
atop the Kress Building. Put another way, the operative
terms of the conveyance do not convey to PRC a real right
enforceable through a judicial proceeding by an action for
injunction or damages if the partnership or any successor in
interest were to build atop the Kress Building. See La. Rev.
Stat. Ann. sec. 9:1252, C.
While we do not believe that the operative terms of the
conveyance are in need of interpretation, we shall for the
sake of argument assume that they are in such need and
consider them in the light of the portion of the preamble to
the conveyance identified by petitioner, which states the
partnership’s desire to grant to PRC ‘‘a scenic, open space’’
servitude as a perpetual real right. On the basis of that lan-
guage, petitioner would have us find a servitude of view,
which the Louisiana Civil Code describes as ‘‘the right by
which the owner of the dominant estate enjoys a view; this
includes the right to prevent the raising of constructions on
the servient estate that would obstruct the view.’’ La. Civ.
Code Ann. art. 701 (2008).
A servitude of view, thus defined, is a rough fit, since,
while the Maison Blanche Building and the land thereunder
may conveniently be considered a servient estate, there is no
dominant estate. A real right created pursuant to La. Rev.
Stat. Ann. sec. 9:1252 does not run in favor of another estate
but, rather, it runs in favor of an organization (here PRC).
Nevertheless, since the Louisiana legislature classified the
real right as a special type of predial servitude, we assume
that, to the extent compatible, rules relating to servitudes of
view, a type of predial servitude, would apply to any similar
real right created pursuant to La. Rev. Stat. Ann. sec.
9:1252. See La. Civ. Code Ann. art. 645 (2010); Whitehouse
I, 131 T.C. at 133.
A predial servitude is established by title; i.e., by juridical
act. See La. Civ. Code Ann. art. 708 (2008). The Supreme
Court of Louisiana has stated: ‘‘For a servitude to be created
by title, the instrument must be express as to the nature and
extent of the servitude.’’ Palomeque v. Prudhomme, 664 So.
2d 88, 93 (1995). The court cautioned: ‘‘Because servitudes

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are so disfavored, an ambiguous agreement to establish a
servitude is unenforceable.’’ Id. at 93–94. The court explained
the reason for disfavoring predial servitudes: ‘‘Predial ser-
vitudes are in derogation of public policy because they form
restraints on the free disposal and use of property.’’ Id. at 93.
It added: ‘‘Therefore, servitudes are not entitled to be viewed
with favor by the law and can never be sustained by implica-
tion.’’ Id. (emphasis added).
The operative terms of the conveyance do not establish a
servitude of view. If the preamble of the conveyance is to be
considered an interpretive aid in understanding that the
operative terms of the conveyance do indeed establish a ser-
vitude of view, it must be that the preamble does so by
implication, since neither the term ‘‘servitude of view’’ nor
any description of a servitude of view appears in the pre-
amble. To accept that a servitude of view (a predial ser-
vitude) is established by implication, however, is prohibited.
See Palomeque, 664 So. 2d at 93–94. The Louisiana Civil
Code provides to similar effect: ‘‘Doubt as to the existence,
extent, or manner of exercise of a predial servitude shall be
resolved in favor of the servient estate.’’ La. Civ. Code Ann.
art. 730. 20 And while because of expected income tax advan-
tage the partnership might not complain about an implied
servitude of view prohibiting it from building on neighboring
property, we have no assurance that a successor owner of the
Maison Blanche Building (whether united with the Kress
Building or not) would be as agreeable.
The Louisiana Civil Code has provided specifically for a
servitude of view for many years. See La. Civ. Code Ann. art.
20 In Whitehouse I, 131 T.C. at 133–134, we set forth cmt. (b) accompanying La. Civ. Code

Ann. art. 730 (2008) (Revision Comments—1977). For convenience, we reproduce it here:
(b) It is a cardinal rule of interpretation that, in case of doubt, instruments purporting to es-
tablish predial servitudes are always interpreted in favor of the owner of the property to be af-
fected. The rule incorporates into Louisiana law the civilian principle that any doubt as to the
free use of immovable property must be resolved in favorem libertatis. * * * The Louisiana Su-
preme Court has repeatedly declared that ‘‘servitudes are restraints on the free disposal and
use of property, and are not, on that account, entitled to be viewed with favor by the law.’’ Par-
ish v. Municipality No. 2, 8 La. Ann. 145, 147 (1853), cited with approval in Buras Ice Factory,
Inc. v. Department of Highways, 235 La. 158, 103 So. 2d 74 (1958). See also McGuffy v. Weil,
240 La. 758, 767, 125 So. 2d 154, 158 (1960): ‘‘any doubt as to the interpretation of a servitude
encumbering property must be resolved in favor of the property owner’’. The rule that the proper
interpretation of an ambiguous instrument is that which least restricts the ownership of the
land has been applied by Louisiana courts in a variety of contexts. See, e.g., Whitehall Oil Co.
v. Heard, 197 So. 2d 672 (La. App. 3rd Cir.), writ refused 250 La. 924, 199 So. 2d 923 (1967)
(determination of the question whether a landowner created a single servitude over contiguous
tracts or a series of multiple interests). * * *

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701 (source: 1977 La. Acts, No. 514, sec. 1, eff. Jan. 1, 1978
(reproducing Art. 716 of the La. Civ. Code of 1870)). If the
drafters of the conveyance had by its terms intended it to
restrict the partnership and any successor-owner of the
Maison Blanche Building from building stories above the
Kress Building or from otherwise blocking views of it, no
doubt they would, in clear terms, have done so. They did not.
No one coming across the conveyance in the conveyance
records of the parish of Orleans could determine from its
terms that they were prohibited (if they owned the Maison
Blanche Building) from building atop the Kress Building or,
say, from putting up a billboard across the street from the
Maison Blanche Building but in direct line of sight of its
facade from some location further away.
C. Conclusion
The conveyance does not create in PRC a real right enforce-
able against the partnership or any successor owner of the
Maison Blanche Building to enjoin (or seek damages from)
any such owner building atop the Kress Building or other-
wise blocking views of the facade.
IV. Valuation of the Servitude
Notwithstanding our conclusion about the terms of the
conveyance, we shall, consistent with the instruction of the
Court of Appeals, reconsider the value of the servitude on the
assumptions that, while it does not burden the Kress
Building, it restricts the partnership from building atop it
and that separate ownership of the Maison Blanche and
Kress Buildings is unlikely (thus, in effect, making that
restriction perpetual).
We have reconsidered the applicability of the reproduction
cost and income approaches for valuing this servitude and,
again, finding them unreliable, have rejected both methods.
We have found the comparable-sales approach to be a reli-
able method of valuation, and we shall again apply it.
Mr. Roddewig testified that the area of the Kress Building
is 16,210 square feet. We accept that measurement. When
that area is added to the 514,566 square feet of area of the
Maison Blanche Building, the area of the Maison Blanche-
Kress parcel is 530,776 square feet. We acknowledged in

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348 139 UNITED STATES TAX COURT REPORTS (304)

Whitehouse I that both experts agreed that larger properties
tend to sell for less per square foot. We accordingly adjusted
the comparable-sale prices for size in Whitehouse I. The addi-
tion of the Kress Building does not warrant any further
adjustment for size.
Neither party asserts that in Whitehouse I we made erro-
neous adjustments to the four comparable-sale prices we
relied on to reach a price per square foot of $23.50 before
imposition of the servitude. We apply that value to the
530,776-square-foot area of the combined buildings. Applying
the price per square foot of $23.50 to the area results in a
total before-restriction value of $12,473,236, which we find is
the before-restriction value of the Maison Blanche-Kress
parcel.
In Whitehouse I, we accepted Mr. Argote’s valuation of the
after-restriction value of the Maison Blanche Building of
$10.3 million. His valuation was based on comparable sales
with an average price per square foot of $20. Applying the
$20-per-square-foot price to the 530,776-square-foot area of
the combined property results in a total after-restriction
value of $10,615,520, whic

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4339383. Public record. Not legal advice.